The Federal Reserve's monetary policy in 2025 has been characterized by a notable shift towards interest rate reductions, contrary to any expectations of hikes. Following a period of elevated rates in late 2024 and early 2025, the central bank initiated a series of cuts aimed at managing inflation and responding to labor market dynamics.
By September 2025, the Fed had already cut interest rates by 25 basis points (bp), bringing the federal funds rate to a range of 4.0%-4.25%. This was followed by another similar cut in October, with a third consecutive 25 bp reduction widely anticipated in December 2025. This expected December cut would lower the target federal funds rate to a range of 3.50%-3.75%, marking its lowest level since September 2022. Market probabilities, as of early December 2025, showed an overwhelming 87-89.6% chance of this reduction occurring [1].
Federal Funds Rate Projections (End of 2025)
| Date/Event | Target Federal Funds Rate Range |
|---|---|
| Sept 2025 | 4.0% - 4.25% |
| Dec 2025 (Expected) | 3.50% - 3.75% |
The median expectation from Federal Open Market Committee (FOMC) officials, updated in September 2025, suggested the federal funds rate would settle around 3.6% by the close of 2025. This projection aligns closely with market sentiment, which anticipates approximately two more rate cuts from the mid-4% range to reach about 3.6% by year-end. JPMorgan Global Research also forecasts two additional cuts in 2025, followed by one in 2026 [1].
The Fed's policy decisions remain highly data-dependent, with inflation and the labor market being primary determinants. While the general trend points to continued easing, divisions persist among policymakers regarding the optimal pace of these rate reductions [1].